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3 Ways FP&A Can Prepare for Extraordinary Events

  • By Nilly Essaides
  • Published: 6/30/2016
Sometimes, financial planning and analysis (FP&A) is in the eye of the storm—think Takata, or VW. How can FP&A help management plan for extraordinary events?

In reality, there aren’t really that many true black-swan events, according to Rob Torok, a partner at consulting firm BetterVu. Sure there are some. Realistically, one cannot build a roof that’s designed to withstand the impact of a wheel that falls off of an airplane. But product recalls, oil spills and fraud have all happened before and should be included in companies’ risk assessments. “You don’t need to know the exact cause to broadly figure out how to recover from it,” he said.
The following are three things FP&A can do in advance of a disaster.

Prepare a playbook. Steve Player, co-author of “Future Ready: How to Master Business Forecasting” and program director for the Beyond Budgeting Round Table North America, encourages companies to do extensive scenario planning exercises for outlying events. He recommends anywhere from four to seven contingency plans, including both good and bad scenarios. “Companies should have a playbook ready in advance so that they can realize what flexibility they have in the event of an opportunity or a negative event,” he said.

Coordinate with ERM. Catastrophic events are at the intersection of planning and enterprise risk management (ERM). However, at too many organizations, the two operate in silos. The 2014 AFP Risk Survey, in collaboration with Oliver Wyman, found that only 50 percent of organizations regularly calibrated their forecasts and key risks. According to Phillip Peck, vice president of finance transformation at Peloton, it’s important that companies embed the principles of good risk management into their planning, forecasting, reporting and analysis, and decision-making processes. “The unexpected can and will happen,” he said. “You have to model those scenarios to present a best estimate so you can have some plans in place.”

Focus on cash flow. When coming up with advanced plans, companies should make sure that they focus on the key concerns (which may be more than net earnings). According to Player, particularly in a severe downturn, cash flow is typically the first thought. “When operations are disrupted they can first slow or stop the conversion cycle, which leaves cash flowing out but not coming back in. So plan to include steps on how to raise or conserve cash,” Player noted.

Don’t fail to plan

Many organizations have stumbled badly in the face of risk events, often arguing that it was a ‘black-swan’ event and not one that they could have foreseen. The FP&A team can avoid this mentality by working with the risk function to develop a handful of response plans, according to Player. While these plans do not need to be excessively detailed, nor can they reflect all possible scenarios, they do form a solid starting point. In the words of Benjamin Franklin, “If you fail to plan, you are planning to fail!”

A key reason why many FP&A departments fail to plan is that they do not have time to create what-if scenarios for improbable events. “FP&A is busy doing variance analysis and creating budgets instead of doing more important work like planning for the future,” Player said. By changing the planning mentality, FP&A is freed up to focus on what is really important.

A longer version of this article will appear in an upcoming edition of AFP Exchange.
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